Decontrolling Gasoline

June 9, 1978

A BIT BELATEDLY, the Carter administration is about to drop the price controls on gasoline. The formal announcement is to come next week, to take effect in September. The reason for the timing is that gasoline prices tend t go up a little at the beginning of the summer vacation season and come down a little at its end. If you were secretary of energy, you would probably feel - as James Schlesinger does - that it's wiser to take off controls when the market's declining.

The immediate effect on prices at the service station will very probably be zero. Those prices are already lower than the ceilings set by the controls. It's the slightly longer future that deserves attention. Sooner or later, gasoline prices will start moving upward again. That's why it's important to get rid of the controls now. Of all the commodities bought and sold every day, gasoline is the rare case in which a rising price is actually good for the country. It encourages drivers to conserve - and conservation continues to be essential. It's one of the few cases in which the inflationary dangers are outweighed by the benefit to national security in holding down oil consumption. Americans are fond of saying, with immense conviction, that prices don't affect anybody's driving habits. But experience shows the opposite. Sharply higher prices and fears about future supplies, after the Arab embargo in late 1973, had a remarkable effect in encouraging this country's turn toward smaller cars.

But gasoline prices have been remarkably stable over the past couple of years. The reason is a small - and, most emphatically, temporary - surplus in worldwide oil production capacity. Currently gasoline consumption in this country is running at a rate of about 7 per cent this time last year. That's a dangerously high increase in usage.

Gasoline prices in the United States are too low. The public would be better served, in years to come, by more expensive gasoline now. A price inching steadily upward would be a steady pressure on all drivers to save fuel. Great disruptive price jumps in the future, like those of 1973-74, would become far less likely.

But driving is, for most people, a necessity. Is it fair to let the price of a necessity go up? The answer is that the price of gasoline has gone up far less rapidly, in the past year, than other and greater necessities. Housing, on the average, went up 7.9 percent. Food prices went up7.8 percent. Costs of medical care went up 8.3 percent. Gasoline, in contrast, went up 1.7 percent. Because it rose less than the inflation rate, an economist would say that its real price fell. In terms of most of the other things that consumers buy, it got cheaper. That helps explain why consumption is accelerating again.

To hold down the prices of oil and oil products, at a time when the rest of the economy is inflating at a brisk 7 percent a year, is irrational. It is a formula for encouraging excessive oil imports, creating even more of a sellers' market abroad, and exposing the country to further embargoes and harassment. The right way to raise gasoline prices would have been through the escalating gasoline tax that President Carter originally proposed more than a year ago. But Congress, which suffers severely from tunnel vision on this subject, adamantly refuses. If Congress won't act, then let the market do it. There aren't many items on which a price increase serves a legitimate and necessary public purpose. But in gasoline, it incites caution and buys a measure of protection.